By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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S/s. 40(a)(i), 195 of the Act – retrospective amendment to law cannot result in tax deduction default and consequent disallowance u/s. 40(a)(i) as section 40(a)(i) is attracted only to payments subject to tax deduction at the time of payment.
Facts:
The taxpayer was an exporter. During the relevant year, it had made payments to certain non-residents for ‘design and development expenses’ without deducting tax u/s. 195 of the Act. According to the taxpayer, the payments were not in nature of FTS, either u/s. 9(1)(vii) or under the relevant DTAAs. Further, none of the payees had a PE in India. Hence, there was no obligation on the taxpayer to deduct tax. However, invoking section 40(a)(i) of the Act, the AO disallowed the payments.
Held:
The Tribunal held as follows.
• Under Article 141 of the Constitution of India, the law laid down by Supreme Court, in Ishikawajma- Harima Heavy Industries Ltd. vs. DIT was binding. Accordingly, unless the technical services were rendered in India, the fees for such services could not be taxed u/s. 9(1)(vii).
• Tax withholding obligation depends on the law existing at the point of time when payments subject to withholding obligation are made. At the time when the taxpayer made the payments to nonresidents and till 8th May 2010, the law laid down by Supreme Court was binding.
• Disallowance u/s. 40(a)(i) is attracted not per se to payments made to non-residents but for payments which are subject to tax deduction but tax has not been deducted4 .
• There was no material to establish that the services, for which payments were made, were rendered in India. Therefore, there was no obligation on taxpayer to deduct tax u/s. 195 r.w.s. 9(1)(vii).
